By: Matt Rego
Semiconductor firms have seen their business environment drastically change over the past five years. Intel (NASDAQ: INTC), for instance, used to rely very heavily on PC sales, as the company’s main focus was to make processors to run with PCs. Unfortunately, PC sales have taken an absolute nosedive in recent years as we have seen the rise of the smartphone and tablet. Intel, along with the rest of the industry is focusing more on chips for these mobile devices rather than the traditional computer. However, there is one chipmaker that stands out above the rest; STMicroelectronics N V (NYSE: STM).
STMicroelectronics is based in Switzerland and is the largest European manufacturer of semiconductors. The company certainly has had a rough run from 2007-2009 but finally posted a profit in 2010. To be sure, profits have been taking a small hit in the last year as the company changes its business model to focus more on mobile phones and not to mention the European debt crisis. Another important aspect is that STM is currently in the process of getting out of the wireless market, which has been hailed as a positive move by analysts. In fact, analysts say that the company could post earnings per share of $0.23 in fiscal 2013 and $0.65 EPS in fiscal 2014, when the exiting should take effect. The point here is that with an exit to the wireless unit, STMicroelectronics is putting itself in a position for high growth.
In early December, the firm released its new strategy plans to investors. In the press release, management signals the transfer from wireless broadband to Embedded Processing Solutions, which include imaging products, digital consumer products, application processors and digital ASICs. It has been estimated that this market is worth $140 billion. “The opportunities in this industry are extremely exciting,” (Yahoo Finance) said Carlos Bozotti, CEO of STMicroelectronics.
Lets take a look at valuation now. The stock has a market cap of $6.82B and has a forward price to earnings of 32.5. However, the wireless business is included in this number so it appears to be more overvalued than it really is. The stock has a nice price to sales of 0.80 and price to book of 1. Additionally, the stock has essentially no debt with a long-term debt to equity of 0.05. Did I mention STM pays a 5.34% dividend yield? Earnings growth is estimated at 176.7% next year, which highlights the company’s new strategy and growth opportunities.
The bottom line here is that the stock has had a nice run as of late and I would not be an immediate buyer. Wait for a pullback before pulling the trigger. Additionally, as I have highlighted in the article, this is a long term holding if you want to reap the benefits of the new strategy and growth. STM is in the process of getting out of the wireless market but that will not be reflected in the financials till 2014. However, with a 5.34% dividend it shouldn’t be too difficult to wait for the changes to take hold.